Have we never had it so bad since the age of Macmillan?

Saturday 4 July 2009 19.01 EDT
First published on Saturday 4 July 2009 19.01 EDT

Last week put a new slant on the economic crisis that was never meant to happen. The headlines screamed at us that in the first quarter of this year the British economy suffered its worst slump in output for 50 years. The news crossed the Atlantic: the New York Times announced "contraction in Britain is severest since 1958". Hang on a minute, I thought. Please note: I did not blog; I did not tweet. That kind of thing is not my scene. No, I merely reflected.

Analysts had been making comparisons with 1929-32, with the early 1980s and the early 1990s. But 1958? Was that not the year after a new prime minister, one Harold Macmillan, had proclaimed, during this very month of July 51 years ago, in a speech in Bedford, close to the heart of Middle England: "Let's be frank about it, most of our people have never had it so good. Go around the country, go to the industrial towns, go to the farms, and you will see a state of prosperity such as we have never had in my lifetime - nor indeed ever in the history of this country."

My memory is that the economy in 1958 did not seem half as bad as it does now. Obviously, the standard of living was a lot lower, but the general mood was surely one of optimism rather than the near despair that permeates the current economic debate. Indeed, what happened in 1958 was that there was a freakish 2.7% drop in output in the second quarter during the course of what was basically a strong upward trend.

The news from the Office for National Statistics about the first quarter of this year was that revised data pointed to an even sharper drop in gross domestic product between October-December 2008 and January-March 2009 than had been estimated - that is to say a fall of 2.4% against a first estimate of 1.9%.

Now 2.4% constitutes an annual rate of decline of close to 10%, which is truly alarming, though the tentative evidence is that in the second quarter the rate of decline slowed sharply, and the economy may - I repeat, may - have reached a trough. However, that still leaves it a very long way short of "recovery".

Before we proceed any further, let us note that, to the extent that output fell more sharply than originally thought - ie, by 25% more than the original estimate - then the Great Structural Fiscal Crisis looks somewhat less bad, and that much more of the deterioration in the government's finances this year can fairly be attributed to the recession, rather than New Labour profligacy. I put it no higher than that, m'lud.

The "blip" in 1958 might have been more prolonged if Macmillan had not overruled his chancellor, Peter Thorneycroft, and two junior Treasury ministers (including Enoch Powell, the ringleader) and refused to accept a package of deflationary measures in January 1958, thereby precipitating the resignation of the chancellor and his two colleagues. As it was, as JCR Dow pointed out in The Management of the British Economy 1945-60, "despite that second quarter dip, GDP (per person employed) rose by 1.2% between 1957 and 1958 and 3.6% the following year". We should be so lucky.

I fear, however, that Macmillan emerges less nobly from another famous episode, thanks to the diligent researches of Lord Williams of Elvel (writing as Charles Williams) in his new biography entitled simply Harold Macmillan (Weidenfeld & Nicolson).

It was well known that Macmillan, when chancellor in 1956, was "first in; first out" of the Suez venture. What Williams has established is that Macmillan's about-turn was less to do with what was happening to the pound, and more the result of his realisation that the whole venture, which he had championed, was hopeless.

Indeed, Williams cites chapter and verse in dismissing the received wisdom that Macmillan changed course because the Americans refused to prop up sterling. It turns out that the initial run on sterling was a lot less severe than he made out, and that if anything, the pressure came from sales emanating from Europe.

Macmillan appears to have gone beyond being economical with the truth. It was known, to put it mildly, that Washington disapproved of the venture; but Williams, with access to a lot more documents than were available to earlier biographers and writers of memoirs, dismisses the view that the change of course over Suez was the result of "a dramatic attack on sterling orchestrated by the American authorities".

It is interesting that the famous "never had it so good speech" has also been distorted by history - but this time, not deliberately by Macmillan himself. An earlier biographer, Sir Nigel Fisher, pointed out that "the words ... were simply a statement of fact and were accompanied by the warning that this state of affairs could not be sustained if prices continued to rise". Macmillan had gone on to say: "Our constant concern today is, can prices be steadied while at the same time we maintain full employment in an expanding economy? Can we control inflation? This is the problem of our time."

It was a time when - guess what? - there was much public debate about how to control the growth of credit. In those more pragmatic days, the Treasury and the Bank of England did not rely solely on what the late Sir Edward Heath neatly described as the "one club" approach of interest rates (the metaphor being a golfing one, not a reference to the "clubbing" favoured today by the young).

Well, there's a great debate going these days about how to prevent the banks and credit growth from getting out of control during the next "recovery". But that is not the problem at the moment. The problem at the moment is the recession, and the spreading fear that we have yet to see the last of the banking crisis. Anyone for tennis?